New York State Department of Tax and Finance begins a sales tax audit by requesting the taxpayer’s books and records. If the auditor doesn’t consider the records “adequate”, he has extensive discretion in making a reasonable calculation of taxable sales. It is important that you maintain and organize your records so they are “adequate’ for an audit.
So what is adequate?
There are specific requirements in recording sales tax and maintaining records. The required records include:
- Exemption documents
- Sales slip, invoice, or other original sales document
- Cash register tape
The sales record must provide detail to determine tax due and collected for each sale. Invoices and sales slips must have items sold indicating which are taxable and a separate line item for sales tax. The cash register tape must also have this level of detail. A tape with total sales may not be deemed adequate. Any deductions, credits, or refunds must also be supported with detail records
Financial records related to the preparation of the sales tax return must also be maintained and available for the audit. These include tax worksheets, general journal, ledgers, sales and purchase journals and schedules accounting for the difference between gross sales and services and taxable sales and services.
Having the records is not sufficient to meet the adequacy test. The records must be organized, such as by date, invoice number, or other ordering method, to permit direct reconciliation of the sales documents with the entries in the books and the sales tax return.
The penalties for not maintaining adequate records are substantial. The taxpayer can be assessed up to $1000 for the first quarter of the failure and up to $5000 for each subsequent quarter. A taxpayer audited for a three-year period could face up to $56,000 in record-keeping penalties.
If the taxpayer has adequate records, the auditor may take several approaches to review the accuracy of the records. He may examine a representative sample of transactions, matching the sales transactions to the journals, following through to the sales tax return. The sample might be a specific time period, such as a full month, or it might be specific group transactions, say for one client, or a combination. If errors are found, the error rate for the sample is applied to the entire audit period. For instance, if the auditor found the sample resulted in taxable sales 5 percent higher than reported, taxable sales for the audit period would be increased by 5 percent
If the books and records are deemed inadequate the auditor may use a variety of methods to calculate sales tax liability. For example, the auditor could extrapolate from industry averages or use indices including rent, utilities, or markup of goods sold. It is difficult to contest the auditor’s conclusions when your own records are not used.
IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.
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